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No champagne toasts as 1999 budget passed

In December 1997, then-Finance Minister Sergej Kozlík celebrated the approval of the 1998 state budget with a champagne toast for parliament's 150 deputies.
Over one year later, the 1999 state budget draft was approved in parliament without fanfare and without champagne. Not only does the new document contain funding cuts for most ministries and state programmes, it also presages other economic austerity measures that will have to be adopted by the government if the budget's fiscal targets for 1999 are to be met.
"Maybe we'll have a reason to toast with champagne when the next budget is approved," said Finance Minister Brigita Schmögnerová, the principal architect of the 1999 draft. "That one could be a little more satifying," she told the daily Sme a few minutes after 91 of 150 deputies voted in favour of the budget on March 26.


Finance Minister Brigita Schmögnerová (right) waits for former Finance Minister Miroslav Maxon (left) to finish his scathing appraisal of the 1999 state budget. Schmögnerová herself took no pleasure in the austere draft, saying that she would rather wait until next year to celebrate.
photo: Vladimír Hák-Profit

In December 1997, then-Finance Minister Sergej Kozlík celebrated the approval of the 1998 state budget with a champagne toast for parliament's 150 deputies.

Over one year later, the 1999 state budget draft was approved in parliament without fanfare and without champagne. Not only does the new document contain funding cuts for most ministries and state programmes, it also presages other economic austerity measures that will have to be adopted by the government if the budget's fiscal targets for 1999 are to be met.

"Maybe we'll have a reason to toast with champagne when the next budget is approved," said Finance Minister Brigita Schmögnerová, the principal architect of the 1999 draft. "That one could be a little more satifying," she told the daily Sme a few minutes after 91 of 150 deputies voted in favour of the budget on March 26.

The budget draft estimates a deficit of 15 billion Slovak crowns ($358 million) in 1999, with revenues of 179.9 billion crowns and expenditures of 194.9 billion crowns. The cabinet of Prime Minister Mikuláš Dzurinda had pledged to cut the fiscal deficit to two percent of the expected 1999 GDP of 815 billion crowns ($19.5 billion) from over five percent last year.

Prime Minister Mikuláš Dzurinda declared himself satisfied with the budget, saying that it was a turning point in the country's economic transition towards western standards.

"This budget means a change of course towards stabilising the economy and towards better order in public finances," Dzurinda said in parliament on the day of the approval.

The government's deficit targets count on GDP growth of between 3 and 4%, with a 10% inflation rate and unemployment under 15%. Analysts have said that these calculations are far too optimistic, and have warned that further economic restrictions will have to be applied if the budget provisions are to be kept.

"The main priority of the government is to meet the 15 billion deficit," said Pavol Ondriška, an analyst with Slávia Capital brokers in Bratislava. "If the deficit looks like it will exceed that threshold, further measures will have to be applied."

Ivan Chodák, an analyst with CA IB securities, agreed with Ondriška, saying he was not very optimistic about the Dzurnda cabinet's chances of meeting its economic goals. "We will see whether the economy reaches the parameters expected by the government. Some scepticism exists," Chodák said on March 29.

Weak points

There was widespread agreement that the budget draft could have been more radical in cutting expenditures on public administration and social welfare.

"Social welfare has to be delivered on a more strict basis to those people who really are dependent on it," said Vladimír Zlacký, an advisor to Deputy Prime Minister for Economy Ivan Mikloš. "Eligibility for social aid should be narrowed," he said.

In an interview for the weekly paper Domino Fórum, Eugen Jurzyca, President of the Center for Economic Development, agreed that the budget's architects had asked very few fundamental questions about the state's costly social welfare system and how to reform it.

"Until we restructure state administration, the pension system, health care and schooling, and until the system for calling public tenders [for state firms] is changed, it's almost usless to criticize the budget," Jurzyca said.

"Both the minimum wage and the unemployment welfare rates are too high, so the social sphere needs fundamental reform," Jurzyca continued.

According to the budget draft, which was to become law as of April 1, the Ministry of Social Affairs, which administers social welfare programmes, was to get 18.85 billion crowns in 1999, slightly up from 18.7 billion the year before. Unemployment insurance transfers increased from 35 million crowns in 1998 to 38 million in 1999.

Parliament approved a hike in the minimum wage in mid-March from 3,000 crowns a month to 3,600 ($90).

VAT or import surcharge?

Since few substantial cuts have been made to welfare programmes, cabinet ministers have been considering other tools to raise state revenues and meet the deficit target. One of the possible measures, mooted by Mikloš in early March, is a hike in the lowest Value Added Tax (VAT) bracket from the current 6% to 10%.

VAT is charged on almost all Slovak goods and services, including food and basic needs. Raising the lower VAT limit is a politically charged issue, as it would have a direct effect on the purchasing power of Slovak citizens.

Mikloš' proposal, which he calculated would bring an additional 6.9 billion crowns to the state budget, has been steadfastly opposed by his coalition partners in the former communist SDĽ party, which has proposed that state revenue shirtfalls be bridged by the imposition of a surcharge on the import of certain goods.

The debate over VAT and the import surcharge has been fierce. Mikloš, for his part, said that the benefits of the import surcharge would be limited, while the harm it would do Slovakia's efforts to enter the Organization for European Cooperation and Development (OECD) later this year would beincalculable.

"It is vital for Slovakia to enter the OECD as soon as possible, since the credibility this would lend the country would help it attract foreign investors. An import surcharge, however, would certainly have a counterproductive effect," Mikloš said at a meeting with OECD officials in Bratislava on March 30.

Val Koromzay, the OECD National Studies Section Director, agreed during the meeting that the import surcharge would not be an efficient tool to secure higher revenues for the budget.

"If the import surcharge were chosen as a tool to increase budget revenues, the OECD opines that it would be more efficient to apply or increase those taxes which cover a wider range of goods consumed, not only imports," Koromzay said to journalists.

But SDĽ representatives, for their part, claim that a VAT increase would have a negative impact on the poorest segment of the population, and have said that the party's deputies would not support the VAT draft if proposed in parliament.

At a March 30 meeting of ministers with economic portfolios, Peter Magvaši, the Social Affairs Minister and an SDĽ party member, was the only minister who voted against the VAT increase draft proposal.

"This is a typical strategy of our leftist brothers in the coalition," a government official told The Slovak Spectator on condition of anonymity. "They try to deadlock such issues, and then hope they are dropped after some time."

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